Federal Tax Incentives:
Second Generation Biofuel Producer Tax Credit IRC § 40(b)(6)
Background
The Second Generation Biofuel Producer Tax credit is an incentive is allowed as a credit against the producer's income tax liability. The incentive originally expired on December 31, 2017, but was retroactively extended through December 31, 2020, by Public Law 116-94. Section 13202 of the Inflation Reduction Act of 2022 (IRA), Pub. L. 117-169 (August 16, 2022), further amended the IRC § 40(b) second generation biofuel producer credit and retroactively extended it from December 31, 2021 through December 31, 2024. Eligible Recipients include registered producers of second-generation biofuels. However, fuel eligible for the IRC § 40 credit may not be eligible for the credits under IRC §§ 40A, 6426.
A second generation biofuel producer that is registered with the Internal Revenue Service (IRS) may be eligible for a tax incentive pursuant to IRC § 40(b)(6) in the amount of up to $1.01 per gallon of second generation biofuel that is:
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sold and used by the purchaser in the purchaser's trade or business to produce a second generation biofuel mixture;
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sold and used by the purchaser as a fuel in a trade or business;
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sold at retail for use as a motor vehicle fuel; used by the producer in a trade or business to produce a second generation biofuel mixture; or
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used by the producer as a fuel in a trade or business. If the second generation biofuel also qualifies for alcohol fuel tax credits, the credit amount is reduced to $0.46 per gallon for biofuel that is ethanol and $0.41 per gallon if the biofuel is not ethanol.
In general, second generation biofuel is defined as liquid fuel produced from any “qualified feedstock” meaning lignocellulosic or hemicellulosic matter that is available on a renewable basis or any cultivated algae, cyanobacteria, or lemna.
To qualify, fuel must also meet the U.S. Environmental Protection Agency fuel and fuel additive registration requirements under section 211 of the Clean Air Act (42 U.S.C. 7545). Alcohol with a proof of less than 150, fuel with a water or sediment content of more than 4%, and fuel with an ash content of more than 1%, or fuel with an acid number greater than 25 are not considered second generation biofuels.
Under current law, only qualified fuel produced in the United States for use in the United States may be eligible. For more information about claiming the credit, see below.
IRC § 40(b)(6) 2nd-Generation Biofuel Producer Credit
In general, the second generation biofuel producer credit of any taxpayer is equal to the applicable amount for each gallon of qualified second generation biofuel production.
IRC § 40(b)(6)(B) defines the "applicable amount" means $1.01, except that such amount shall, in the case of second generation biofuel which is alcohol, be reduced by the sum of—
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the amount of the credit in effect for such alcohol under IRC § 40(b)(1) Alcohol Mixture Credit (without regard to subsection IRC § 40(b)(3) Smaller Credit For Lower Proof Alcohol) at the time of the qualified second generation biofuel production, plus
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in the case of ethanol, the amount of the credit in effect under IRC § 40(b)(4) Small Ethanol Producer Credit at the time of such production.
IRC § 40(b)(6)(C) defines the term “qualified second generation biofuel production” means any second generation biofuel which is produced by the taxpayer, and which during the taxable year—
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is sold by the taxpayer to another person—
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for use by such other person in the production of a qualified second generation biofuel mixture in such other person's trade or business (other than casual off-farm production),
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for use by such other person as a fuel in a trade or business, or
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who sells such second generation biofuel at retail to another person and places such second generation biofuel in the fuel tank of such other person, or
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is used or sold by the taxpayer for any purpose described in IRC § 40(b)(6)(C)(i).
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The qualified second generation biofuel production of any taxpayer for any taxable year shall not include any alcohol which is purchased by the taxpayer and with respect to which such producer increases the proof of the alcohol by additional distillation.
IRC § 40(b)(6)(D) defines the term “qualified second generation biofuel mixture” means a mixture of second generation biofuel and gasoline or of second generation biofuel and a special fuel which—
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is sold by the person producing such mixture to any person for use as a fuel, or
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is used as a fuel by the person producing such mixture.
IRC § 40(b)(6)(E)(i) defines the term “second generation biofuel” means any liquid fuel which—
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is derived by, or from, qualified feedstocks, and
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IRC § 40(b)(6)(F) defines the term “qualified feedstock” means—
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any lignocellulosic or hemicellulosic matter available on a renewable or recurring basis, and
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any cultivated algae, cyanobacteria, or lemna.
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meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U.S.C. 7545).
IRC § 40(b)(6)(E)(ii)-(iii) states the term “second generation biofuel” shall not include the following:
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any alcohol with a proof of less than 150 pursuant to IRC § 40(b)(6)(E)(ii);
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The determination of the proof of any alcohol shall be made without regard to any added denaturants.
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any fuel if pursuant to IRC § 40(b)(6)(E)(iii)–-
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more than 4 percent of such fuel (determined by weight) is any combination of water and sediment,
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the ash content of such fuel is more than 1 percent (determined by weight), or
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such fuel has an acid number greater than 25.
IRC § 40(b)(6)(G) Special Rules For Algae
In the case of fuel which is derived by, or from, feedstock described IRC § 40(b)(6)(F)(ii) (any cultivated algae, cyanobacteria, or lemna) and which is sold by the taxpayer to another person for refining by such other person into a fuel which meets the requirements of subparagraph IRC § 40(b)(6)(E)(i)(II) (meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U.S.C. 7545)) and the refined fuel is not excluded under IRC § 40(b)(6)(E)(iii)—
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such sale shall be treated as described in IRC § 40(b)(6)(C)(i),
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such fuel shall be treated as meeting the requirements of IRC § 40(b)(6)(E)(i)(II) and as not being excluded under IRC § 40(b)(6)(E)(iii) in the hands of such taxpayer, and
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except as provided in this subparagraph, such fuel (and any fuel derived from such fuel) shall not be taken into account under IRC § 40(b)(6)(C) with respect to the taxpayer or any other person.
IRC § 40(b)(6)(I) Registration Requirement
No credit shall be determined under this paragraph with respect to any taxpayer unless such taxpayer is registered with the Secretary as a producer of second generation biofuel under section 4101.
IRC § 40(c) Coordination With Exemption From Excise Tax
The amount of the credit determined under this section with respect to any alcohol shall, under regulations prescribed by the Secretary, be properly reduced to take into account any benefit provided with respect to such alcohol solely by reason of the application of section 4041(b)(2), section 6426, or section 6427(e).
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